The complete history of student loans

Americans collectively owe more than $1.74 trillion in student loan debt — a number that keeps rising as tuition costs continue to increase. Not only that, but a 2022  Bankrate survey found that 70 percent of millennial and Gen Z borrowers have put off major milestones, like saving money for retirement, paying off high-interest debt and buying a house, because of their student loans.

The current state of student loans results from many years of policy and legislation. Here’s a complete timeline of what led to the creation of student loans, as well as their evolution throughout the years and what you can expect from them moving forward.

Student loans: A complete timeline

The process of getting a student loan has changed over the decades, as have some of the associated risks and benefits. Here’s what to know.

1944: GI Bill

In the summer of 1944, President Franklin D. Roosevelt signed the Servicemen’s Readjustment Act to help World War II veterans transition back into society. This law, commonly known as the GI Bill, made it easier for veterans and service members to go to college or vocational school by significantly reducing their tuition costs, among other things. To this day, service members can receive financial assistance through the GI Bill.

1958: National Defense Education Act

World War II sparked fierce competition between the U.S. and Russia, particularly when the latter launched the world’s first space satellite, Sputnik, in 1957. Naturally, this caused concerns among Americans that they were falling behind — technologically speaking.

To make higher education more affordable and amp up the system to meet the nation’s technological and defense needs, President Eisenhower signed the National Defense Education Act in 1958. Among its provisions, this law offered grants, scholarships and student loans to those majoring in engineering, math, education, science and foreign languages.

1965: Higher Education Act

During his presidency, Lyndon Johnson urged Congress to enact a law that made postsecondary education more accessible to both low- and middle-income families, stressing that education was “no longer a luxury, but a necessity.”

Congress listened, and in November of 1965, the Higher Education Act became official. This law significantly increased federal funds for colleges and universities and created numerous scholarships and grants for students with “considerable” financial need.

The Higher Education Act also gave birth to the Guaranteed Student Loan Program, also known as the Federal Family Education Loan Program or FFELP.

1972: The Basic Educational Opportunity Grant

Created in 1972, the Basic Educational Opportunity Grant was designed to reduce the cost of college for low-income students pursuing their first undergraduate degree. Today, this grant is known as the Pell Grant, after it was renamed in 1980 in honor of Democratic U.S. Senator Claiborne Pell of Rhode Island, who was the driving force behind its approval.

The Pell Grant is a fundamental part of a student’s financial aid package, with a maximum award of $6,895 for the 2022-23 academic year.

1992: Higher Education Amendments

A revision to the Higher Education Act in 1992 resulted in a significant expansion of the federal student loan program. Up until this point, all federal loans were subsidized, meaning that the government absorbed the interest while students were in school.

With the Higher Education Amendments of 1992, the federal government began to offer unsubsidized loans to all students — regardless of their financial need — as long as they were enrolled at least half time at a qualifying institution.

These amendments also created the Free Application for Federal Student Aid, or FAFSA, and a pilot program for income-sensitive repayment.

2001: Economic Growth and Tax Reconciliation Relief Act

In his presidential campaign in 2000, President George W. Bush promised a series of tax cuts to stimulate the American economy and end the recession. This was materialized in June of 2001 when he signed the Economic Growth and Tax Reconciliation Act.

This law also eliminated the time limit for how long borrowers could deduct student loan interest from their taxes. The limit on how much interest could be deducted was also raised to $2,500, where it still sits today.

2005: Higher Education Reconciliation Act

President George W. Bush signed another law to help student loan borrowers during his second term. With the Higher Education Reconciliation Act, graduate students became eligible for PLUS loans. These loans have higher interest rates than other federal loans for graduate school, but they allow students to borrow up to the total cost of attendance.

2007: College Cost Reduction and Access Act

Also signed by President George W. Bush, the College Cost Reduction and Access Act of 2007 resulted in several major milestones.

The act pledged to reduce interest rates over five years and increased the Pell Grant program’s funding by $11.4 billion. In addition, both the Income-Based Repayment Program and the Public Service Loan Forgiveness Program (PSLF) were born to make student loan repayment more manageable.

2010: FFELP is eliminated

In 2010, President Obama signed the Health Care and Education Reconciliation Act, which eliminated the Federal Family Education Loan Program by requiring all federal student loans to be Direct Loans, offered by the government’s William D. Ford Federal Direct Loan Program.

2015: Revised Pay As You Earn

The Department of Education made changes in 2015 to the Pay As You Earn repayment plan to include all borrowers, not just those who took out loans on or after Oct. 1, 2007.

These changes resulted in the Revised Pay As You Earn repayment plan, which caps your monthly payments at 10 percent of your discretionary income.

2020 – present: COVID-19 and student loan forbearance

In 2020, the world was hit by the COVID-19 pandemic, which led to massive layoffs and a recession. As a response, Former President Trump signed the CARES Act on March 27, 2020. Among other provisions, this law granted temporary relief to borrowers by placing all federal student loans on administrative forbearance, interest-free.
Although payments were scheduled to restart that same year, borrowers got several extensions, finally declaring the restart of payments in October 2023.

During the past year, the Biden administration has also made substantial changes to federal programs to bring more borrowers closer to forgiveness. These include expanding borrower defense, removing taxes from any forgiven balances until 2025, automatically waiving federal student loan interest for service members and automatically forgiving debt for disabled borrowers.

U.S. student debt crisis in numbers

The chart below shows how the nation’s student loan balance has grown over the last decade, going from $1.05 trillion in 2012 to nearly $1.75 trillion today.

The future of student loans

Student loans are a hot topic in the political space, particularly after the Supreme Court decision to reject the Biden administration’s loan forgiveness program. So far, the administration has responded with changes to the income-driven repayment program and has promised more work to come to relieve borrowers.

In the meantime, Stuart Siegel, financial aid specialist and founder of FAFSAssist, encourages borrowers to explore these options to make their payments more manageable once repayments begin:

• Apply for an income-driven repayment plan. If you have federal student loans and can’t afford your standard student loan payment, applying for an income-driven repayment plan can substantially reduce how much you pay each month.
• See if you qualify for forgiveness. With all the changes with the PSLF program, you may qualify for federal student loan forgiveness or at least move closer to it if you’ve worked at a nonprofit organization, government agency or another qualifying employer.
• Consider refinancing your private loans. Private student loans don’t have the same protections as federal student loans, and it could be wise to refinance them before interest rates go up — especially if you currently have a variable rate.

The bottom line

Student loans have come a long way since they became available in the 1950s. Although some changes are happening to make the system more efficient, there’s still a lot of work to be done. Until then, the best thing you can do is explore your options to choose the one that best suits your financial circumstances and needs.